Momentum indicator

Overview

The Momentum indicator measures the amount that

a security's price has changed over a given time span.

Interpretation

The interpretation of the Momentum indicator is identical

to the interpretation of the Price ROC. Both indicators display

the rate-of-change of a security's price. However,

the Price ROC indicator displays the rate-of-change as

a percentage whereas the Momentum indicator displays

the rate-of-change as a ratio.

There are basically two ways to use the Momentum indicator:

You can use the Momentum indicator as a trend-following

oscillator similar to the MACD (this is the method I prefer).

Buy when the indicator bottoms and turns up and sell when

the indicator peaks and turns down. You may want to plot

a short-term (e.g., 9-period) moving average of the indicator

to determine when it is bottoming or peaking.

If the Momentum indicator reaches extremely high or

low values (relative to its historical values), you should

assume a continuation of the current trend. For example,

if the Momentum indicator reaches extremely high values

and then turns down, you should assume prices will probably

go still higher. In either case, only trade after prices confirm

the signal generated by the indicator (e.g., if prices peak

and turn down, wait for prices to begin to fall before selling).

You can also use the Momentum indicator as a leading indicator.

This method assumes that market tops are typically identified

by a rapid price increase (when everyone expects prices to go higher)

and that market bottoms typically end with rapid price declines

(when everyone wants to get out). This is often the case,

but it is also a broad generalization.

As a market peaks, the Momentum indicator will climb sharply

and then fall off-- diverging from the continued upward or

sideways movement of the price. Similarly, at a market bottom,

Momentum will drop sharply and then begin to climb well ahead

of prices. Both of these situations result in divergences between

0 - General (picture 1)

1 - Most (picture 2)

2 - General with EMA (picture 3)